Tuesday, July 2, 2013

Microsoft and Google start their fight over jury instructions on breach of FRAND contract

In less than two months from today, the breach-of-FRAND-contract trial in the Microsoft v. Motorola contract dispute will be held in the Western District of Washington. It will be a jury trial. And it will be a steep challenge for Motorola to persuade those "good citizens of the Pacific Northwest" of its position that the initial $4 billion annual royalty demand did not constitute a breach of its FRAND commitment, considering that the court arrived at a FRAND royalty that according to Microsoft corresponds to $1.8 million per year. Motorola's own counsel conceded at a hearing last year that a "blatantly unreasonable" initial demand would constitute a breach. If a factor of more than 2,000 isn't "blatantly unreasonable", what else is? In my opinion, something like asking for 50% more than a FRAND royalty would be unreasonable. Twice FRAND, for sure. But more than two thousand times FRAND is an insanity.

Still, the jury trial will have to take place unless a summary judgment motion renders it unnecessary (even if that doesn't happen, the scope of the trial could be narrowed considerably). Judge James Robart absolutely wants to stay on schedule and granted a stipulated motion (i.e., something the parties agreed on) for modifications to the pretrial schedule only in part and denied other parts (this post continues below the document):

Yesterday (Monday) the parties had a deadline for their submissions on what the law is on the question of good faith (or, conversely, bad faith), in the context of a contractual dispute. The judge told the parties that it seems "the real fight in this is going to be jury instructions": what the jury will be told about the legal standard for a breach of contract in this case. Judge Robart asked for these filings on the legal standard in order to get started early with an exchange of positions.

This is separate from the parties' opening pre-trial briefs, which are due tomorrow (July 3).

Formally, Motorola Solutions is also a defendant. When the initial royalty demand was made, Motorola Mobility had not yet been spun off of Motorola. Motorola Solutions is the former parent comapny. In practical terms it's hard to imagine that Motorola Solutions itself has much to fear: presumably it was part of the Google M&A deal that Google would have to pay any damages the court might order as a result of what happened in the patent dispute with Microsoft.

It's too early to go into too much detail on this, but I'll just quickly outline what the parties agree and disagree on.

Google presumably likes the part in which Microsoft acknowledges that "there is no one-size-fits-all definition of good faith and fair dealing" because it "varies somewhat with the context" and "[a] complete catalogue of types of bad faith is impossible". At this high level, the parties will likely agree. But the starting point is that Google somehow has to justify Motorola's initial $4 billion demand against the backdrop of a $1.8 million royalty determination by the court. And even the degree of vagueness (or I might call it "flexibility" or "adaptiveness") that Microsoft concedes is insufficient to explain away a discrepancy of this magnitude. Still, Google must try.

The first identifiable disagreement between the parties relates to the objective and subjective components of good (or bad) faith. Microsoft argues that "dishonesty or subjective bad faith is not required to breach the implied duty of good faith and fair dealing". It cites to the Ninth Circuit's 2001 decision in Scribner v. Worldcom, which held that "a party can breach the duty of good faith and fair dealing by acting dishonestly or unlawfully does not mean that dishonesty or an unlawful purpose is a necessary predicate to proving bad faith". In this case, a certain committee may very well have "felt it was treating [the plaintiff] fairly and lawfully by allowing him to exercise some of his options, or that it honestly felt it was acting in the best interests of the company", but that doesn't mean there can't be a breach of an implied duty of good faith and fair dealing regardless.

The Ninth Circuit is the relevant one here. Google says the Uniform Commercial Code "similar defines 'good faith' to require both 'honesty in fact and the observance of commercial standards of fair dealing'". It also cites a Fourth Circuit decision distinguishing between an objective prong and a subjective prong of "good faith". But if something is one of the requirements for good faith, its opposite isn't necessarily an indispensable requirement for bad faith.

Besides basically saying that it didn't know its offer was outside the FRAND ballpark when it made it, Motorola also hopes to use "industry custom or practice" as an excuse.

Microsoft compares the situation in which a patentee who has to honor a FRAND pledge makes an initial offer to a scenario in which one party to a contract enjoysdiscretion to set certain terms and must act reasonably.

A fundamental disagreement between the parties relates to the question of whether Microsoft had any particular obligations to negotiate with Motorola prior to bringing this case. Judge Robart has previously said that Microsoft was entitled to do so. At the time Motorola was arguing that Microsoft had repudiated FRAND by filing a contract complaint. Google/Motorola want the jury to look not only at their initial demand and ultimatum, but to somehow conclude that this could have been a very FRANDly negotiation had Microsoft "negotiated" instead of filing suit. I've previously explained why I believe Motorola's initial demand letters weren't really an invitation to negotiate, but an ultimatum. And Google's perspective on FRAND negotiations is that those should take place under threat -- ideally (from Google's vantage point, not mine) the threat of injunctive relief, or alternatively at least the threat of what is incorrectly labeled "baseball arbitration" (and just another form of extortion).

Both parties refer in their filings to the notion of a party frustrating the performance of the contract. And -- guess what -- either one says or at least implies that the other party frustrated the performance of the FRAND agreement.

These are really interesting issues, and as I said, I'll elaborate on them going forward. For now I just wanted to provide this very rough outline of the parties' initial positions on the legal framework.

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About Me

Florian Mueller is an app developer who used to be an award-winning intellectual property activist. His 30 years of software industry expertise span different market segments (games, education, productivity and infrastructure software), diverse business models, and technical and commercial areas of responsibility. In recent years, Florian advised a diversity of clients on the patent wars surrounding mobile devices, and on their economic and technical implications. (In order to avoid conflicts of interest, Florian does not hold or initiate transactions in any technology stocks or derivatives thereof, except that he is long AAPL.) He is now developing games for smartphones and tablet computers.